Banks are continuing to maintain a cautious stance on lending to microfinance institutions (MFIs), even with their enhanced capital position after the Reserve Bank of India (RBI) rolled back higher risk weight on bank lending to non-banking finance companies (NBFCs), bankers say.
“I think we have to watch a couple of quarters more before we can say the stress is bottomed out in MFI sector. Lower risk weights alone would not lead banks to lend more to MFIs,” a senior banker said. They said that banks are cautious in lending to even the 10-15 top MFIs. The Karnataka government’s ordinance on MFI loans has vitiated broader credit culture in the State, and the State accounts for a large sum of MFI loans.
A veteran banker said banks’ micro loan book, and MFIs who have converted into small finance banks (SFBs) are also showing higher slippages, leading to broader negative sentiment around the MFI sector.
“MFI is a peculiar industry where it performs well when borrowers have good credit discipline and when there is a clear indication from lenders to borrowers that they will get further funds,” the banker said. “Banks need to take care of their own MFI funding, loans to MFI and micro loan buyout book. Before they do this, they would not consider increasing exposure to MFIs,” they added.
Growth slowdown
Chirag Gambhir, Associate Director, CAREEdge Ratings, says MFIs have raised ₹17,500 crore via securitisation in 9MFY25, lower than ₹24,500 crore in corresponding period last year. The lower rated MFIs are getting funds from NBFCs as banks remain cautious.
MFIs’ disbursements have also shrunk across key players, while delinquencies are rising. MFIs have seen multiple rating downgrades due to liquidity issues, asset quality and reduction in disbursements, he said.
“Also, the performance of MFI PTC transactions have been hit in last 6-7 months as cumulative collection efficiency has dipped to around 92-93 per cent which was around 97-98 per cent earlier. Because of this the delinquencies have risen,” Gambhir said.
“However, all the transactions in CareEdge ratings portfolio has been well covered with sufficient cushion in terms of credit enhancement which includes principal subordination (in the form of OC, Equity Tranche), Cash Collateral and EIS. CareEdge rating has not seen any downward rating action in any of its MFI transactions till date, primarily due to cheery picking of loans in PTC transactions,” he added.
A senior banker said the positive part is that all the key MFIs are reasonably well capitalised, and are backed by large private equity players. Concerns for most of MFIs is slow down in loan growth, with collections outpacing disbursements.
“Therefore, these institutions also require lesser capital at this stage. Requirement for funds will rise when disbursements outpace collections. This will take some time as currently borrowers themselves are de-leveraging,” they said.
“In my view, requirement for funds will come down further before it starts to move up. Collection efficiency is slowly getting better so credit cost will start to come down. There will be pain to come for sure for some period. This could lead to ratings being impacted and higher borrowing cost for MFIs,” they added.
